Adding the popular Gatorade to its fleet of non-carbonated
beverages, which includes Aquafina water, Lipton teas and Tropicana
juices, will give PepsiCo control of the dominant brand in the $2.5
billion sports drink category.

“This will be a truly outstanding combination,” Roger A.
Enrico, PepsiCo chairman and chief executive officer, said in a
statement. “Bringing together Quaker and PepsiCo creates a wealth
of exciting growth opportunities.”

Management Changes

PepsiCo will offer 2.3 of its shares for each Quaker share under
the deal announced today. The boards of both companies approved
the deal over the weekend, but it’s still subject to regulatory
approval.

When the deal closes, Enrico said Steve Reinemund, PepsiCo
president and chief operating officer, will succeed him as chairman
and CEO. Chief financial officer Indra Nooyi will add the title of
president.

Morrison, Quaker chairman and CEO, will be a vice chairman of
the combined company.

Under terms of the deal, Quaker Oats can back out if PepsiCo’s
stock dips below $40 a share for a period of 10 random days in the
month before closing. Under this scenario, PepsiCo would have to
increase the share-exchange ratio in order to keep the deal alive.

Quenching a Long Thirst

At least two PepsiCo rivals had a similar thirst to acquire
Quaker Oats: the board of Coca-Cola abandoned talks to buy
Quaker for a reported $15.75 billion two weeks ago and French food
conglomerate Danone SA backed away from a possible bid.

In the end, PepsiCo beat out its competitors with an offer that
essentially mirrored the one rejected by Chicago-based Quaker
roughly one month ago.

“Gatorade would do even better under PepsiCo than it has under
Quaker Oats because of better marketing and distribution,” said
John Sicher, a veteran soft drink industry watcher who publishes
Beverage Digest in New York.

The deal could raise antitrust concerns because of PepsiCo’s
ownership of All-Sport, a competing brand to Gatorade, albeit with
much less market share. However, PepsiCo has agreed to get rid of
All-Sport in order to keep the deal alive.

‘Good for Competition’

Tom Pirko, who heads the beverage consulting firm Bevmark in
Santa Barbara, Calif., said a PepsiCo-owned Gatorade would actually
be good for competition. Under PepsiCo, Gatorade would benefit from
a vast distribution system and over time would spur demand for more
products in the sports drink category, he said.

Pirko said the acquisition of Quaker Oats, and Gatorade in
particular, would give PepsiCo a “huge psychological edge” in its
competition with Atlanta-based Coca-Cola, the world’s leading soft
drink manufacturer. “PepsiCo is building a formidable “package of
leading brands,” he said.

While picking up Gatorade was no doubt the primary thrust of
this transaction for PepsiCo, analysts were quick to point out that
Quaker Oats’ food products, which include granola snack bars and
rice cakes, nicely complement PepsiCo’s line of salty snacks.

“Quaker Oats’ grain-based snacks could show real growth within
the Frito-Lay marketing and distribution system,” Sicher said.
“PepsiCo’s Frito-Lay division is the nation’s leader in salty
snacks with brands such as Lay’s, Fritos and Doritos chips.

Quaker vast food business also includes such brands as Quaker
and Life cereals, and Rice-A-Roni.

Coca-Cola abandoned its pursuit of Quaker Oats after the soft
drink company’s board rejected a deal reportedly worth $15.75
billion. Only hours after Coca Cola’s announcement, the French food
conglomerate Danone issued a statement that it may be interested in
making a bid for Quaker Oats. But it also dropped out of the
running.

More than a Sports Drink

Gatorade began in the 1960s as a drink for thirsty athletes but
has become a mainstream beverage.

Beverage Digest estimated Gatorade accounted for 84.1 percent of
take-home sales of sports drinks in the first nine months of this
year. Coke’s Powerade had 10.9 percent while PepsiCo’s All Sport
had 2.8 percent, Beverage Digest said.